statement of financial accounting standards no. 60 · statement of financial accounting standards...

Statement of Financial Accounting

Standards No. 60

FAS60 Status Page FAS60 Summary

Accounting and Reporting by Insurance Enterprises

June 1982

Financial Accounting Standards Board of the Financial Accounting Foundation 401 MERRITT 7, P.O. BOX 5116, NORWALK, CONNECTICUT 06856-5116

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Copyright © 1982 by Financial Accounting Standards Board. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Standards Board.

Statement of Financial Accounting Standards No. 60

Accounting and Reporting by Insurance Enterprises

June 1982

CONTENTSParagraphNumbers

Introduction .................................................................................................................. 1–5Applicability and Scope ................................................................................................... 6Standards of Financial Accounting and Reporting:

General Principles ................................................................................................ 7–12Premium Revenue Recognition.......................................................................... 13–16Claim Cost Recognition ..................................................................................... 17–20Liability for Future Policy Benefits.................................................................... 21–26Costs Other Than Those Relating to Claims and Policy Benefits................................................................................................. 27Acquisition Costs ............................................................................................... 28–31Premium Deficiency........................................................................................... 32–37Reinsurance ........................................................................................................ 38–40Policyholder Dividends ...................................................................................... 41–43Retrospective and Contingent Commission Arrangements...................................... 44Investments......................................................................................................... 45–51Real Estate Used in the Business ............................................................................. 52Separate Accounts .............................................................................................. 53–54Income Taxes of Life Insurance Enterprises ...................................................... 55–59Disclosures ............................................................................................................... 60Amendments to Other Pronouncements............................................................. 61–63Effective Date and Transition............................................................................. 64–65

Appendix A: Glossary................................................................................................... 66Appendix B: Background Information and Summary of

Consideration of Comments on Exposure Draft ................................................ 67–89

Copyright © 1982, Financial Accounting Standards Board Not for redistribution

FAS 60: Accounting and Reporting by Insurance Enterprises

FAS 60 Summary

This Statement extracts the specialized principles and practices from the AICPAinsurance industry related Guides and Statements of Position and establishes financialaccounting and reporting standards for insurance enterprises other than mutual life insuranceenterprises, assessment enterprises, and fraternal benefit societies. Insurance contracts, for purposes of this Statement, need to be classified as short-durationor long-duration contracts. Long-duration contracts include contracts, such as whole-life,guaranteed renewable term life, endowment, annuity, and title insurance contracts, that areexpected to remain in force for an extended period. All other insurance contracts are consideredshort-duration contracts and include most property and liability insurance contracts. Premiums from short-duration contracts ordinarily are recognized as revenue over theperiod of the contract in proportion to the amount of insurance protection provided. Claim costs,including estimates of costs for claims relating to insured events that have occurred but have notbeen reported to the insurer, are recognized when insured events occur. Premiums from long-duration contracts are recognized as revenue when due frompolicyholders. The present value of estimated future policy benefits to be paid to or on behalf ofpolicyholders less the present value of estimated future net premiums to be collected frompolicyholders are accrued when premium revenue is recognized. Those estimates are based onassumptions, such as estimates of expected investment yields, mortality, morbidity, terminations,and expenses, applicable at the time the insurance contracts are made. Claim costs arerecognized when insured events occur. Costs that vary with and are primarily related to the acquisition of insurance contracts(acquisition costs) are capitalized and charged to expense in proportion to premium revenuerecognized. Investments are reported as follows: common and nonredeemable preferred stocks atmarket, bonds and redeemable preferred stocks at amortized cost, mortgage loans at outstandingprincipal or amortized cost, and real estate at depreciated cost. Realized investment gains andlosses are reported in the income statement below operating income and net of applicable incometaxes. Unrealized investment gains and losses, net of applicable income taxes, are included instockholders' (policyholders') equity.


INTRODUCTION

1. The primary purpose of insurance is to provide economic protection from identified risksoccurring or discovered within a specified period. Some types of risks insured include death,disability, property damage, injury to others, and business interruption. Insurance transactionsmay be characterized generally by the following:

a. The purchaser of an insurance contract makes an initial payment or deposit to the insuranceenterprise in advance of the possible occurrence or discovery of an insured event.

b. When the insurance contract is made, the insurance enterprise ordinarily does not know if,how much, or when amounts will be paid under the contract.

2. Two methods of premium revenue and contract liability recognition for insurance contractshave developed, which are referred to as short-duration and long-duration contract accounting inthis Statement. Generally, the two methods reflect the nature of the insurance enterprise'sobligations and policyholder rights under the provisions of the contract.

3. Premiums from short-duration insurance contracts, such as most property and liabilityinsurance contracts, are intended to cover expected claim 1 costs resulting from insured eventsthat occur during a fixed period of short duration. The insurance enterprise ordinarily has theability to cancel the contract or to revise the premium at the beginning of each contract period tocover future insured events. Therefore, premiums from short-duration contracts ordinarily areearned and recognized as revenue evenly as insurance protection is provided.

4. Premiums from long-duration insurance contracts, including many life insurance contracts,generally are level even though the expected policy benefits and services do not occur evenlyover the periods of the contracts. Functions and services provided by the insurer includeinsurance protection, sales, premium collection, claim payment, investment, and other services.Because no single function or service is predominant over the periods of most types oflong-duration contracts, premiums are recognized as revenue over the premium-paying periodsof the contracts when due from policyholders. Premium revenue from long-duration contractsgenerally exceeds expected policy benefits in the early years of the contracts and it is necessaryto accrue, as premium revenue is recognized, a liability for costs that are expected to be paid inthe later years of the contracts. Accordingly, a liability for expected costs relating to most typesof long-duration contracts is accrued over the current and expected renewal periods of thecontracts.

5. Title insurance contracts provide protection for an extended period and therefore areconsidered long-duration contracts. Premiums from title insurance contracts ordinarily arerecognized as revenue on the effective date of the contract because most of the services


associated with the contract have been rendered by that time. Estimated claim costs arerecognized when premium revenue is recognized because the insurance provides protectionagainst claims caused by problems with title to real estate arising out of ascertainable insuredevents that generally exist at that time.

APPLICABILITY AND SCOPE

6. This Statement establishes accounting and reporting standards for the general-purposefinancial statements of stock life insurance enterprises, property and liability insuranceenterprises,2 and title insurance enterprises. Except for the sections on premium revenue andclaim cost recognition and acquisition costs (paragraphs 9-11, 13-18, and 20-31), this Statementapplies to mortgage guaranty insurance enterprises. It does not apply to mutual life insuranceenterprises, assessment enterprises, or fraternal benefit societies.

STANDARDS OF FINANCIAL ACCOUNTING AND REPORTING

General Principles

7. Insurance contracts, for purposes of this Statement, shall be classified as short-duration orlong-duration contracts depending on whether the contracts are expected to remain in force 3 foran extended period. The factors that shall be considered in determining whether a particularcontract can be expected to remain in force for an extended period are:

a. Short-duration contract. The contract provides insurance protection for a fixed period ofshort duration and enables the insurer to cancel the contract or to adjust the provisions of thecontract at the end of any contract period, such as adjusting the amount of premiumscharged or coverage provided.

b. Long-duration contract. The contract generally is not subject to unilateral changes in itsprovisions, such as a noncancelable or guaranteed renewable contract, and requires theperformance of various functions and services (including insurance protection) for anextended period.

8. Examples of short-duration contracts include most property and liability insurancecontracts and certain term life insurance contracts, such as credit life insurance. Examples oflong-duration contracts include whole-life contracts, guaranteed renewable term life contracts,endowment contracts, annuity contracts, and title insurance contracts. Accident and healthinsurance contracts may be short-duration or long-duration depending on whether the contractsare expected to remain in force for an extended period. For example, individual and groupinsurance contracts that are noncancelable or guaranteed renewable (renewable at the option of


the insured), or collectively renewable (individual contracts within a group are not cancelable),ordinarily are long-duration contracts.

9. Premiums from short-duration insurance contracts ordinarily shall be recognized asrevenue over the period of the contract in proportion to the amount of insurance protectionprovided. A liability for unpaid claims (including estimates of costs for claims relating toinsured events that have occurred but have not been reported to the insurer) and a liability forclaim adjustment expenses shall be accrued when insured events occur.

10. Premiums from long-duration contracts shall be recognized as revenue when due frompolicyholders. A liability for expected costs relating to most types of long-duration contractsshall be accrued over the current and expected renewal periods of the contracts. The presentvalue of estimated future policy benefits to be paid to or on behalf of policyholders less thepresent value of estimated future net premiums to be collected from policyholders (liability forfuture policy benefits) shall be accrued when premium revenue is recognized. Those estimatesshall be based on assumptions, such as estimates of expected investment yields, mortality,morbidity, terminations, and expenses, applicable at the time the insurance contracts are made.In addition, liabilities for unpaid claims and claim adjustment expenses shall be accrued wheninsured events occur.

11. Costs that vary with and are primarily related to the acquisition of insurance contracts(acquisition costs) shall be capitalized and charged to expense in proportion to premium revenuerecognized. Other costs incurred during the period, such as those relating to investments,general administration, and policy maintenance, shall be charged to expense as incurred.

12. Accounting for investments by insurance enterprises presumes that (a) insuranceenterprises have both the ability and the intent to hold long-term investments, such as bonds,mortgage loans, and redeemable preferred stocks, to maturity and (b) there is no decline in themarket value of the investments other than a temporary decline. Accordingly, bonds, mortgageloans, and redeemable preferred stocks shall be reported at amortized cost. Common andnonredeemable preferred stocks shall be reported at market, and real estate shall be reported atdepreciated cost.

Premium Revenue Recognition

Short-Duration Contracts

13. Premiums from short-duration contracts ordinarily shall be recognized as revenue over theperiod of the contract in proportion to the amount of insurance protection provided. For thosefew types of contracts for which the period of risk differs significantly from the contract period,premiums shall be recognized as revenue over the period of risk in proportion to the amount of


insurance protection provided. That generally results in premiums being recognized as revenueevenly over the contract period (or the period of risk, if different), except for those few cases inwhich the amount of insurance protection declines according to a predetermined schedule.

14. If premiums are subject to adjustment (for example, retrospectively rated or otherexperience-rated insurance contracts for which the premium is determined after the period of thecontract based on claim experience or reporting-form contracts for which the premium isadjusted after the period of the contract based on the value of insured property), premiumrevenue shall be recognized as follows:

a. If, as is usually the case, the ultimate premium is reasonably estimable, the estimatedultimate premium shall be recognized as revenue over the period of the contract. Theestimated ultimate premium shall be revised to reflect current experience.

b. If the ultimate premium cannot be reasonably estimated, the cost recovery method or thedeposit method may be used until the ultimate premium becomes reasonably estimable.

Long-Duration Contracts

15. Premiums from long-duration contracts, such as whole-life contracts (includinglimited-payment and single-premium life contracts), guaranteed renewable term life contracts,endowment contracts, annuity contracts, and title insurance contracts, shall be recognized asrevenue when due from policyholders.

16. Premiums from title insurance contracts shall be considered due from policyholders and,accordingly, recognized as revenue on the effective date of the insurance contract. However, thebinder date (the date a commitment to issue a policy is given) is appropriate if the insuranceenterprise is legally or contractually entitled to the premium on the binder date. If reasonablyestimable, premium revenue and costs relating to title insurance contracts issued by agents shallbe recognized when the agents are legally or contractually entitled to the premiums, usingestimates based on past experience and other sources. If not reasonably estimable, premiumrevenue and costs shall be recognized when agents report the issuance of title insurancecontracts.

Claim Cost Recognition

17. A liability for unpaid claim costs relating to insurance contracts other than title insurancecontracts, including estimates of costs relating to incurred but not reported claims, shall beaccrued when insured events occur. A liability for estimated claim costs relating to titleinsurance contracts, including estimates of costs relating to incurred but not reported claims,shall be accrued when title insurance premiums are recognized as revenue (paragraphs 15 and16).

18. The liability for unpaid claims shall be based on the estimated ultimate cost of settling the


claims (including the effects of inflation and other societal and economic factors), using pastexperience adjusted for current trends, and any other factors that would modify past experience.4Changes in estimates of claim costs resulting from the continuous review process and differencesbetween estimates and payments for claims shall be recognized in income of the period in whichthe estimates are changed or payments are made. Estimated recoveries on unsettled claims, suchas salvage, subrogation, or a potential ownership interest in real estate, shall be evaluated interms of their estimated realizable value and deducted from the liability for unpaid claims.Estimated recoveries on settled claims other than mortgage guaranty and title insurance claimsalso shall be deducted from the liability for unpaid claims.

19. Real estate acquired in settling mortgage guaranty and title insurance claims shall bereported at fair value, that is, the amount that reasonably could be expected to be received in acurrent sale between a willing buyer and a willing seller. If no market price is available, theexpected cash flows (anticipated sales price less maintenance and selling costs of the real estate)may aid in estimating fair value provided the cash flows are discounted at a rate commensuratewith the risk involved. Real estate acquired in settling claims shall be separately reported in thebalance sheet and shall not be classified as an investment. Subsequent reductions in the reportedamount and realized gains and losses on the sale of real estate acquired in settling claims shall berecognized as an adjustment to claim costs incurred.

20. A liability for all costs expected to be incurred in connection with the settlement of unpaidclaims (claim adjustment expenses) shall be accrued when the related liability for unpaidclaims is accrued. Claim adjustment expenses include costs associated directly with specificclaims paid or in the process of settlement, such as legal and adjusters' fees. Claim adjustmentexpenses also include other costs that cannot be associated with specific claims but are related toclaims paid or in the process of settlement, such as internal costs of the claims function.5

Liability for Future Policy Benefits

21. A liability for future policy benefits relating to long-duration contracts other than titleinsurance contracts (paragraph 17) shall be accrued when premium revenue is recognized. Theliability, which represents the present value of future benefits to be paid to or on behalf ofpolicyholders and related expenses less the present value of future net premiums (portion ofgross premium required to provide for all benefits and expenses), shall be estimated usingmethods that include assumptions, such as estimates of expected investment yields, mortality,morbidity, terminations, and expenses, applicable at the time the insurance contracts are made.The liability also shall consider other assumptions relating to guaranteed contract benefits, suchas coupons, annual endowments, and conversion privileges. The assumptions shall includeprovision for the risk of adverse deviation. Original assumptions shall continue to be used insubsequent accounting periods to determine changes in the liability for future policy benefits(often referred to as the "lock-in concept") unless a premium deficiency exists (paragraphs35-37). Changes in the liability for future policy benefits that result from its periodic estimationfor financial reporting purposes shall be recognized in income in the period in which the changes


occur.

Investment Yields

22. Interest assumptions used in estimating the liability for future policy benefits shall bebased on estimates of investment yields (net of related investment expenses) expected at the timeinsurance contracts are made. The interest assumption for each block of new insurance contracts(a group of insurance contracts that may be limited to contracts issued under the same plan in aparticular year) shall be consistent with circumstances, such as actual yields, trends in yields,portfolio mix and maturities, and the enterprise's general investment experience.

Mortality

23. Mortality assumptions used in estimating the liability for future policy benefits shall bebased on estimates of expected mortality.

Morbidity

24. Morbidity assumptions used in estimating the liability for future policy benefits shall bebased on estimates of expected incidences of disability and claim costs. Expected incidences ofdisability and claim costs for various types of insurance (for example, noncancelable andguaranteed renewable accident and health insurance contracts) and other factors, such asoccupational class, waiting period, sex, age, and benefit period, shall be considered in makingmorbidity assumptions. The risk of antiselection (the tendency for lower terminations of poorrisks) also shall be considered in making morbidity assumptions.

Terminations

25. Termination assumptions used in estimating the liability for future policy benefits shall bebased on anticipated terminations and nonforfeiture benefits, using anticipated terminationrates and contractual nonforfeiture benefits. Termination rates may vary by plan of insurance,age at issue, year of issue, frequency of premium payment, and other factors. If composite ratesare used, the rates shall be representative of the enterprise's actual mix of business. Terminationassumptions shall be made for long-duration insurance contracts without termination benefitsbecause of the effects of terminations on anticipated premiums and claim costs.

Expenses

26. Expense assumptions used in estimating the liability for future policy benefits shall bebased on estimates of expected nonlevel costs, such as termination or settlement costs, and costsafter the premium-paying period. Renewal expense assumptions shall consider the possibleeffect of inflation on those expenses.

Costs Other Than Those Relating to Claims and Policy Benefits

27. Costs incurred during the period, such as those relating to investments, general


administration, and policy maintenance, that do not vary with and are not primarily related to theacquisition of new and renewal insurance contracts shall be charged to expense as incurred.

Acquisition Costs

28. Acquisition costs are those costs that vary with and are primarily related to the acquisitionof new and renewal insurance contracts. Commissions and other costs (for example, salaries ofcertain employees involved in the underwriting and policy issue functions, and medical andinspection fees) that are primarily related to insurance contracts issued or renewed during theperiod in which the costs are incurred shall be considered acquisition costs.

29. Acquisition costs shall be capitalized and charged to expense in proportion to premiumrevenue recognized. To associate acquisition costs with related premium revenue, acquisitioncosts shall be allocated by groupings of insurance contracts consistent with the enterprise'smanner of acquiring, servicing, and measuring the profitability of its insurance contracts.Unamortized acquisition costs shall be classified as an asset.

30. If acquisition costs for short-duration contracts are determined based on a percentagerelationship of costs incurred to premiums from contracts issued or renewed for a specifiedperiod, the percentage relationship and the period used, once determined, shall be applied toapplicable unearned premiums throughout the period of the contracts.

31. Actual acquisition costs for long-duration contracts shall be used in determiningacquisition costs to be capitalized as long as gross premiums are sufficient to cover actual costs.However, estimated acquisition costs may be used if the difference is not significant.Capitalized acquisition costs shall be charged to expense using methods that include the sameassumptions used in estimating the liability for future policy benefits.

Premium Deficiency

32. A probable loss on insurance contracts exists if there is a premium deficiency relating toshort-duration or long-duration contracts. Insurance contracts shall be grouped consistent withthe enterprise's manner of acquiring, servicing, and measuring the profitability of its insurancecontracts to determine if a premium deficiency exists.

Short-Duration Contracts

33. A premium deficiency shall be recognized if the sum of expected claim costs and claimadjustment expenses, expected dividends to policyholders, unamortized acquisition costs, andmaintenance costs exceeds related unearned premiums.6

34. A premium deficiency shall first be recognized by charging any unamortized acquisitioncosts to expense to the extent required to eliminate the deficiency. If the premium deficiency is


greater than unamortized acquisition costs, a liability shall be accrued for the excess deficiency.

Long-Duration Contracts

35. Original policy benefit assumptions for long-duration contracts ordinarily continue to beused during the periods in which the liability for future policy benefits is accrued (paragraph 21).However, actual experience with respect to investment yields, mortality, morbidity, terminations,or expenses may indicate that existing contract liabilities, together with the present value offuture gross premiums, will not be sufficient (a) to cover the present value of future benefits tobe paid to or on behalf of policyholders and settlement and maintenance costs relating to a blockof long-duration contracts and (b) to recover unamortized acquisition costs. In thosecircumstances, a premium deficiency shall be determined as follows:

Present value of future payments for benefits and related settlement and maintenancecosts, determined using revised assumptions based on actual and anticipatedexperience $XX

Less the present value of future gross premiums, determinedusing revised assumptions based on actual and anticipated experience XX

Liability for future policy benefits using revised assumptions XX

Less the liability for future policy benefits at the valuation date, reduced byunamortized acquisition costs XX

Premium deficiency $XX

36. A premium deficiency shall be recognized by a charge to income and (a) a reduction ofunamortized acquisition costs or (b) an increase in the liability for future policy benefits. If apremium deficiency does occur, future changes in the liability shall be based on the revisedassumptions. No loss shall be reported currently if it results in creating future income. Theliability for future policy benefits using revised assumptions based on actual and anticipatedexperience shall be estimated periodically for comparison with the liability for future policybenefits (reduced by unamortized acquisition costs) at the valuation date.

37. A premium deficiency, at a minimum, shall be recognized if the aggregate liability on anentire line of business is deficient. In some instances, the liability on a particular line of businessmay not be deficient in the aggregate, but circumstances may be such that profits would berecognized in early years and losses in later years. In those situations, the liability shall beincreased by an amount necessary to offset losses that would be recognized in later years.

Reinsurance


38. Amounts that are recoverable from reinsurers and that relate to paid claims and claimadjustment expenses shall be classified as assets, with an allowance for estimated uncollectibleamounts. Estimated amounts recoverable from reinsurers that relate to the liabilities for unpaidclaims and claim adjustment expenses shall be deducted from those liabilities. Ceded unearnedpremiums shall be netted with related unearned premiums. Receivables and payables from thesame reinsurer, including amounts withheld, also shall be netted. Reinsurance premiums cededand reinsurance recoveries on claims may be netted against related earned premiums andincurred claim costs in the income statement.

39. Proceeds from reinsurance transactions that represent recovery of acquisition costs shallreduce applicable unamortized acquisition costs in such a manner that net acquisition costs arecapitalized and charged to expense in proportion to net revenue recognized (paragraph 29). Ifthe ceding enterprise has agreed to service all of the related insurance contracts withoutreasonable compensation, a liability shall be accrued for estimated excess future servicing costsunder the reinsurance contract. The net cost to the assuming enterprise shall be accounted for asan acquisition cost.

40. To the extent that a reinsurance contract does not, despite its form, provide forindemnification of the ceding enterprise by the reinsurer against loss or liability, the premiumpaid less the premium to be retained by the reinsurer shall be accounted for as a deposit by theceding enterprise. Those contracts may be structured in various ways, but if, regardless of form,their substance is that all or part of the premium paid by the ceding enterprise is a deposit, theamount paid shall be accounted for as such. A net credit resulting from the contract shall bereported as a liability by the ceding enterprise. A net charge resulting from the contract shall bereported as an asset by the reinsurer.

Policyholder Dividends

41. Policyholder dividends shall be accrued using an estimate of the amount to be paid.

42. If limitations exist on the amount of net income from participating insurance contractsof life insurance enterprises that may be distributed to stockholders, the policyholders' share ofnet income on those contracts that cannot be distributed to stockholders shall be excluded fromstockholders' equity by a charge to operations and a credit to a liability relating to participatingpolicyholders' funds in a manner similar to the accounting for net income applicable to minorityinterests. Dividends declared or paid to participating policyholders shall reduce that liability;dividends declared or paid in excess of the liability shall be charged to operations. Income-baseddividend provisions shall be based on net income that includes adjustments betweengeneral-purpose and statutory financial statements that will reverse and enter into futurecalculations of the dividend provision.

43. For life insurance enterprises for which there are no net income restrictions and that uselife insurance dividend scales unrelated to actual net income, policyholder dividends (based on


dividends anticipated or intended in determining gross premiums or as shown in publisheddividend illustrations at the date insurance contracts are made) shall be accrued over thepremium-paying periods of the contracts.

Retrospective and Contingent Commission Arrangements

44. If retrospective commission or experience refund arrangements exist underexperience-rated insurance contracts, a separate liability shall be accrued for those amounts,based on experience and the provisions of the contract. Income in any period shall not includeany amounts that are expected to be paid to agents or others in the form of experience refunds oradditional commissions. Contingent commissions receivable or payable shall be accrued overthe period in which related income is recognized.

Investments

45. Bonds shall be reported at amortized cost if the insurance enterprise has both the abilityand the intent to hold the bonds until maturity and there is no decline in the market value of thebonds other than a temporary decline. If an insurance enterprise is a trader in bonds and does notintend to hold the bonds until maturity, bonds shall be reported at market and temporary changesin the market value of the bonds shall be recognized as unrealized gains or losses (paragraph 50).

46. Common and nonredeemable preferred stocks shall be reported at market and temporarychanges in the market value of those securities shall be recognized as unrealized gains or losses(paragraph 50). Preferred stocks that by their provisions must be redeemed by the issuer shall bereported at amortized cost if the insurance enterprise has both the ability and the intent to holdthe stocks until redemption and there is no decline in the market value of the stocks other than atemporary decline.

47. Mortgage loans shall be reported at outstanding principal balances if acquired at par value,or at amortized cost if purchased at a discount or premium, with an allowance for estimateduncollectible amounts, if any. Amortization and other related charges or credits shall be chargedor credited to investment income. Changes in the allowance for estimated uncollectible amountsrelating to mortgage loans shall be included in realized gains and losses.

48. Real estate investments shall be reported at cost less accumulated depreciation and anallowance for any impairment in value. Depreciation and other related charges or credits shallbe charged or credited to investment income. Changes in the allowance for any impairment invalue relating to real estate investments shall be included in realized gains and losses.

49. Normal commitment fees received in connection with the placement of mortgage loans(less direct costs) shall be capitalized and recognized as revenue over the commitment period.Commitment fees that exceed current (normal) fees for mortgage loan commitments shall beconsidered an adjustment of the effective interest yield on the loan. Those excess fees shall be


capitalized until the loan is made and then recognized as revenue over the period of the mortgageloan. If the mortgage loan is not ultimately made, the unamortized commitment fee shall berecognized as revenue at the end of the commitment period.

50. Realized gains and losses on all investments (including, but not limited to, stocks, bonds,mortgage loans, real estate, and joint ventures) shall be reported in the income statement belowoperating income and net of applicable income taxes. Realized gains and losses on the sale ofassets other than investments, such as real estate used in the business, shall be reported inaccordance with APB Opinion No. 30, Reporting the Results of Operations. Unrealizedinvestment gains and losses, net of applicable income taxes, shall be reported as a separatecomponent of stockholders' (policyholders') equity. Except as discussed in paragraph 51,unrealized gains or losses on common stocks, preferred stocks, or publicly traded bonds shall notbe recognized in income until the sale, maturity, or other disposition of the investment.7

51. If a decline in the value of a common stock, preferred stock, or publicly traded bondbelow its cost or amortized cost is considered to be other than temporary, the investment shall bereduced to its net realizable value, which becomes the new cost basis. The amount of thereduction shall be reported as a realized loss. A recovery from the new cost basis shall berecognized as a realized gain only at the sale, maturity, or other disposition of the investment.

Real Estate Used in the Business

52. Real estate shall be classified either as an investment or as real estate used in theenterprise's operations, depending on its predominant use. Depreciation and other real estateoperating costs shall be classified as investment expenses or operating expenses consistent withthe balance sheet classification of the related asset. Imputed investment income and rentalexpense shall not be recognized for real estate used in the business.

Separate Accounts

53. Separate accounts represent assets and liabilities that are maintained by an insuranceenterprise for purposes of funding fixed-benefit or variable annuity contracts, pension plans,and similar activities. The contract holder generally assumes the investment risk, and theinsurance enterprise receives a fee for investment management, certain administrative expenses,and mortality and expense risks assumed.

54. Investments in separate accounts shall be reported at market except for separate accountcontracts with guaranteed investment returns. For those separate accounts, the related assetsshall be reported in accordance with paragraphs 45-51. Separate account assets and liabilitiesordinarily shall be reported as summary totals in the financial statements of the insuranceenterprise.


Income Taxes of Life Insurance Enterprises

Deferred Income Taxes

55. Because of the provisions of the Life Insurance Company Income Tax Act of 1959 (Act),8timing differences (paragraph 13(e) of APB Opinion No. 11, Accounting for Income Taxes) oflife insurance enterprises arising in the current period may not affect the determination of incometaxes in future periods when those timing differences reverse. Amounts determined in thewith-and-without calculation (paragraph 36 of Opinion 11) need to be considered further todetermine whether the difference will reverse in the future. Deferred taxes need not be providedfor the current tax effect of timing differences if circumstances indicate that the current tax effectwill not reverse in the future. Similarly, a change in category of taxation (the basis on which theenterprise determines its income tax liability) resulting from the with-and-without calculationneed not be recognized unless circumstances indicate that a change in category will result whenthe timing difference reverses. If the reversal of tax effects cannot be reasonably determined,deferred income taxes shall be provided based on the differential determined using thewith-and-without calculation as if the enterprise's tax return was filed on the basis on whichfinancial statements are prepared, including any resulting change in category of taxation.

56. Although (a) special deductions (allowable only for income tax purposes) never enter intothe determination of pretax accounting income in any period and (b) the amount of policyholderdividend deductions and special deductions may be limited on the tax return (the unuseddeductions cannot be carried forward to subsequent periods), the amount of policyholderdividend deductions and available special deductions and limitations on those deductions mayproperly be determined based on pretax accounting income. For example, unused policyholderdividend deductions and special deductions may be used to offset timing differences that affecttaxable income to the extent that the limitations on those deductions change when based onpretax accounting income, unless known or anticipated circumstances indicate that future taxableincome resulting from the reversal of timing differences will not be offset by like deductions. Inthe case of provisions for policyholder dividends (including policyholder dividends deducted aspart of the change in the liability for future policy benefits), which may be timing differencesthemselves, statutory limitations shall not be applied to eliminate their current tax effect unlesscircumstances indicate that the dividends will be limited when the timing differences reverse.Special deductions that are directly affected by timing differences need to be redetermined in thewith-and-without calculation unless circumstances indicate that future special deductions willnot be directly affected by the timing differences when the timing differences reverse. If thereversal of tax effects cannot be reasonably determined, special deductions that are not affectedby timing differences and, therefore, do not reverse shall be limited to amounts available in thetax return.

57. A life insurance enterprise's liability for future policy benefits and capitalization and


amortization of acquisition costs indirectly affect the amount of taxable investment income usedin determining the income tax provision for financial reporting purposes. Differences in taxableinvestment income caused by differences between the liability for future policy benefits andcapitalization and amortization of acquisition costs for income tax and financial reportingpurposes shall be considered permanent differences (paragraph 13(f) of Opinion 11).

58. If deferred income taxes have not been provided on timing differences on the presumptionthat the timing differences will not have tax effects when they reverse and circumstances changeso that it becomes apparent that tax effects will result, deferred income taxes attributable to thosetiming differences shall be accrued and reported as income tax expense in that period; thoseincome taxes shall not be reported as an extraordinary item. If deferred income taxes have beenprovided on timing differences and circumstances change so that it becomes apparent that the taxeffects will differ from those originally expected, income taxes previously deferred shall beincluded in income only as the related timing differences reverse, regardless of whether the lifeinsurance enterprise uses the gross change or net change method (paragraph 37 of Opinion 11).

Policyholders' Surplus

59. A difference between taxable income and pretax accounting income attributable toamounts designated as policyholders' surplus of a life insurance enterprise may not reverse untilindefinite future periods or may never reverse. The insurance enterprise controls the events thatcreate the tax consequences, and the enterprise generally is required to take specific actionbefore the initial difference reverses. Therefore, a life insurance enterprise shall not accrueincome taxes on the difference between taxable income and pretax accounting incomeattributable to amounts designated as policyholders' surplus. However, if circumstances indicatethat the insurance enterprise is likely to pay income taxes, either currently or in later years,because of a known or expected reduction in policyholders' surplus, income taxes attributable tothat reduction shall be accrued as a tax expense of the current period; the accrual of those incometaxes shall not be accounted for as an extraordinary item.

Disclosures

60. Insurance enterprises shall disclose the following in their financial statements:

a. The basis for estimating the liabilities for unpaid claims and claim adjustment expensesb. The methods and assumptions used in estimating the liability for future policy benefits with

disclosure of the average rate of assumed investment yields in effect for the current yearencouraged

c. The nature of acquisition costs capitalized, the method of amortizing those costs, and theamount of those costs amortized for the period

d. The carrying amount of liabilities for unpaid claims and claim adjustment expenses relatingto short-duration contracts that are presented at present value in the financial statements andthe range of interest rates used to discount those liabilities


e. Whether the insurance enterprise considers anticipated investment income in determining ifa premium deficiency relating to short-duration contracts exists

f. The nature and significance of reinsurance transactions to the insurance enterprise'soperations, including reinsurance premiums assumed and ceded, and estimated amounts thatare recoverable from reinsurers and that reduce the liabilities for unpaid claims and claimadjustment expenses

g. The relative percentage of participating insurance, the method of accounting forpolicyholder dividends, the amount of dividends, and the amount of any additional incomeallocated to participating policyholders

h. The following information relating to stockholders' equity, statutory capital and surplus, andthe effects of statutory accounting practices on the enterprise's ability to pay dividends tostockholders:(1) The amount of statutory capital and surplus(2) The amount of statutory capital and surplus necessary to satisfy regulatory

requirements (based on the enterprise's current operations) if significant in relation tothe enterprise's statutory capital and surplus

(3) The nature of statutory restrictions on the payment of dividends and the amount ofretained earnings that is not available for the payment of dividends to stockholders

i. For life insurance enterprises or a parent of a life insurance enterprise that is eitherconsolidated or accounted for by the equity method:(1) The treatment of policyholders' surplus under the U.S. Internal Revenue Code and that

income taxes may be payable if the enterprise takes certain specified actions, whichshall be appropriately described

(2) The accumulated amount of policyholders' surplus for which income taxes have notbeen accrued

j. For life insurance enterprises, any retained earnings in excess of policyholders' surplus onwhich no current or deferred federal income tax provisions have been made and the reasonsfor not providing the deferred taxes

Amendments to Other Pronouncements

61. The following footnote is added to the end of paragraph 6 of Opinion 11:

For life insurance enterprises, also refer to paragraphs 55-59 and subparagraphs60(i) and 60(j) of FASB Statement No. 60, Accounting and Reporting byInsurance Enterprises.

62. The provisions of APB Opinion No. 23, Accounting for Income Taxes—Special Areas,that discuss policyholders' surplus of life insurance enterprises have been included in thisStatement without reconsideration, and paragraphs 26-30 and footnote 11 of Opinion 23 aresuperseded by this Statement.

63. The references to AICPA insurance industry related Guides in footnote 8 of Opinion 30,


paragraphs 41 and 102 of FASB Statement No. 5, Accounting for Contingencies, paragraph 4 ofFASB Interpretation No. 15, Translation of Unamortized Policy Acquisition Costs by a StockLife Insurance Company, and paragraph 7 of FASB Interpretation No. 22, Applicability ofIndefinite Reversal Criteria to Timing Differences, are replaced by a reference to FASBStatement No. 60, Accounting and Reporting by Insurance Enterprises. The references toAICPA Statements of Position (SOPs) 78-6, Accounting for Property and Liability InsuranceCompanies, and 79-3, Accounting for Investments of Stock Life Insurance Companies, and to theAICPA Industry Audit Guides, Audits of Fire and Casualty Insurance Companies and Audits ofStock Life Insurance Companies, are deleted from Appendix A of FASB Statement No. 32,Specialized Accounting and Reporting Principles and Practices in AICPA Statements of Positionand Guides on Accounting and Auditing Matters. The reference to the AICPA project onaccounting by title insurance companies, which resulted in the issuance of SOP 80-1, Accountingfor Title Insurance Companies, is deleted from Appendix B of Statement 32.

Effective Date and Transition

64. This Statement shall be effective for fiscal years beginning after December 15, 1982, withearlier application encouraged. Accounting changes adopted to conform to the provisions of thisStatement shall be applied retroactively. In the year that this Statement is first applied, thefinancial statements shall disclose the nature of any restatement and its effect on income beforeextraordinary items, net income, and related per share amounts for each year presented. Theindividual effects of changing to conform to the provisions of this Statement shall be disclosed inthe financial statements.

65. If retroactive restatement of all years presented is not practicable, the financial statementspresented shall be restated for as many consecutive years as practicable and the cumulative effectof applying this Statement shall be included in determining net income of the earliest yearrestated (not necessarily the earliest year presented). If it is not practicable to restate any prioryear, the cumulative effect shall be included in net income in the year in which this Statement isfirst applied. (Refer to paragraph 20 of APB Opinion No. 20, Accounting Changes.)

The provisions of this Statement neednot be applied to immaterial items.

This Statement was approved by the unanimous vote of the seven members of theFinancial Accounting Standards Board:

Donald J. Kirk, Chairman Frank E. Block John W. March Robert A. Morgan David Mosso


Robert T. Sprouse Ralph E. Walters

Appendix A: GLOSSARY

66. This appendix defines certain terms that are used in this Statement.

Acquisition costsCosts incurred in the acquisition of new and renewal insurance contracts. Acquisitioncosts include those costs that vary with and are primarily related to the acquisition ofinsurance contracts (for example, agent and broker commissions, certain underwritingand policy issue costs, and medical and inspection fees).

Annuity contractA contract that provides fixed or variable periodic payments made from a stated orcontingent date and continuing for a specified period, such as for a number of years or forlife. Also refer to variable annuity contract.

Assessment enterpriseAn insurance enterprise that sells insurance to groups with similar interests, such aschurch denominations or professional groups. Some assessment enterprises also sellinsurance directly to the general public. If funds are not sufficient to pay claims, thenassessments may be made against members.

ClaimA demand for payment of a policy benefit because of the occurrence of an insured event,such as the death or disability of the insured; the maturity of an endowment; theincurrence of hospital or medical bills; the destruction or damage of property and relateddeaths or injuries; defects in, liens on, or challenges to the title to real estate; or theoccurrence of a surety loss.

Claim adjustment expensesExpenses incurred in the course of investigating and settling claims. Claim adjustmentexpenses include any legal and adjusters' fees, and the costs of paying claims and allrelated expenses.

Cost recovery methodUnder the cost recovery method, premiums are recognized as revenue in an amount equalto estimated claim costs as insured events occur until the ultimate premium is reasonablyestimable, and recognition of income is postponed until that time.


Credit life insuranceLife insurance, generally in the form of decreasing term insurance, that is issued on thelives of borrowers to cover payment of loan balances in case of death.

Deposit methodUnder the deposit method, premiums are not recognized as revenue and claim costs arenot charged to expense until the ultimate premium is reasonably estimable, andrecognition of income is postponed until that time.

Dividends to policyholdersAmounts distributable to policyholders of participating insurance contracts as determinedby the insurer. Under various state insurance laws, dividends are apportioned topolicyholders on an equitable basis. The dividend allotted to any contract often is basedon the amount that the contract, as one of a class of similar contracts, has contributed tothe income available for distribution as dividends.

Endowment contractAn insurance contract that provides insurance from inception of the contract to thematurity date (endowment period). The contract specifies that a stated amount, adjustedfor items such as policy loans and dividends, if any, will be paid to the beneficiary if theinsured dies before the maturity date. If the insured is still living at the maturity date, thepolicyholder will receive the maturity amount under the contract after adjustments, ifany. Endowment contracts generally mature at a specified age of the insured or at theend of a specified period.

Fraternal benefit societyAn organization that provides life or health insurance to its members and theirbeneficiaries. Policyholders normally participate in the earnings of the society, andinsurance contracts stipulate that the society has the power to assess its members if thefunds available for future policy benefits are not sufficient to provide for benefits andexpenses.

Gross premiumThe premium charged to a policyholder for an insurance contract. Also refer to netpremium.

Group insuranceInsurance protecting a group of persons, usually employees of an entity and theirdependents. A single insurance contract is issued to their employer or otherrepresentative of the group. Individual certificates often are given to each insuredindividual or family unit. The insurance usually has an annual renewable contract period,although the insurer may guarantee premium rates for two or three years. Adjustments topremiums relating to the actual experience of the group of insured persons are common.


Incurred but not reported claimsClaims relating to insured events that have occurred but have not yet been reported to theinsurer or reinsurer as of the date of the financial statements.

Liability for claim adjustment expensesThe amount needed to provide for the estimated ultimate cost required to investigate andsettle claims relating to insured events that have occurred on or before a particular date(ordinarily, the balance sheet date), whether or not reported to the insurer at that date.

Liability for future policy benefitsAn accrued obligation to policyholders that relates to insured events, such as death ordisability. The liability for future policy benefits can be viewed as either (a) the presentvalue of future benefits to be paid to or on behalf of policyholders and expenses less thepresent value of future net premiums payable under the insurance contracts or (b) theaccumulated amount of net premiums already collected less the accumulated amount ofbenefits and expenses already paid to or on behalf of policyholders.

Liability for unpaid claimsThe amount needed to provide for the estimated ultimate cost of settling claims relatingto insured events that have occurred on or before a particular date (ordinarily, the balancesheet date). The estimated liability includes the amount of money that will be requiredfor future payments on both (a) claims that have been reported to the insurer and (b)claims relating to insured events that have occurred but have not been reported to theinsurer as of the date the liability is estimated.

Life insurance enterpriseAn enterprise that can issue annuity, endowment, and accident and health insurancecontracts as well as life insurance contracts. Life insurance enterprises may be eitherstock or mutual organizations.

Maintenance costsCosts associated with maintaining records relating to insurance contracts and with theprocessing of premium collections and commissions.

MorbidityThe relative incidence of disability due to disease or physical impairment.

MortalityThe relative incidence of death in a given time or place.

Mortgage guaranty insurance enterpriseAn insurance enterprise that issues insurance contracts that guarantee lenders, such as


savings and loan associations, against nonpayment by mortgagors.

Net premiumAs used in this Statement for long-duration insurance contracts, the portion of the grosspremium required to provide for all benefits and expenses.

Nonforfeiture benefitsThose benefits in a life insurance contract that the policyholder does not forfeit, even forfailure to pay premiums. Nonforfeiture benefits usually include cash value, paid-upinsurance value, or extended-term insurance value.

Participating insuranceInsurance in which the policyholder is entitled to participate in the earnings or surplus ofthe insurance enterprise. The participation occurs through the distribution of dividends topolicyholders.

Property and liability insurance enterpriseAn enterprise that issues insurance contracts providing protection against (a) damage to,or loss of, property caused by various perils, such as fire and theft, or (b) legal liabilityresulting from injuries to other persons or damage to their property. Property andliability insurance enterprises also can issue accident and health insurance contracts. Theterm property and liability insurance enterprise is the current terminology used todescribe a fire and casualty insurance enterprise. Property and liability insuranceenterprises may be either stock or mutual organizations.

Reciprocal or interinsurance exchangeA group of persons, firms, or corporations commonly referred to as "subscribers" thatexchange insurance contracts through an attorney-in-fact (an attorney authorized by aperson to act in that person's behalf).

ReinsuranceA transaction in which a reinsurer (assuming enterprise), for a consideration (premium),assumes all or part of a risk undertaken originally by another insurer (ceding enterprise).However, the legal rights of the insured are not affected by the reinsurance transactionand the insurance enterprise issuing the insurance contract remains liable to the insuredfor payment of policy benefits.

Risk of adverse deviationA concept used by life insurance enterprises in estimating the liability for future policybenefits relating to long-duration contracts. The risk of adverse deviation allows forpossible unfavorable deviations from assumptions, such as estimates of expectedinvestment yields, mortality, morbidity, terminations, and expenses. The concept isreferred to as risk load when used by property and liability insurance enterprises.


SalvageThe amount received by an insurer from the sale of property (usually damaged) on whichthe insurer has paid a total claim to the insured and has obtained title to the property.

Statutory accounting practicesAccounting principles required by statute, regulation, or rule, or permitted by specificapproval, that an insurance enterprise is required to follow when submitting its financialstatements to state insurance departments.

SubrogationThe right of an insurer to pursue any course of recovery of damages, in its name or in thename of the policyholder, against a third party who is liable for costs relating to aninsured event that have been paid by the insurer.

Term life insuranceInsurance that provides a benefit if the insured dies within the period specified in thecontract. The insurance is for level or declining amounts for stated periods, such as 1, 5,or 10 years, or to a stated age. Term life insurance generally has no loan or cash value.

TerminationIn general, the failure to renew an insurance contract. Involuntary terminations includedeath, expirations, and maturities of contracts. Voluntary terminations of life insurancecontracts include lapses with or without cash surrender value and contract modificationsthat reduce paid-up whole-life benefits or term-life benefits.

Termination rateThe rate at which insurance contracts fail to renew. Termination rates usually areexpressed as a ratio of the number of contracts on which insureds failed to pay premiumsduring a given period to the total number of contracts at the beginning of the period fromwhich those terminations occurred. The complement of the termination rate ispersistency, which is the renewal quality of insurance contracts, that is, the number ofinsureds that keep their insurance in force during a period. Persistency varies by plan ofinsurance, age at issue, year of issue, frequency of premium payment, and other factors.

Title insurance enterpriseAn enterprise that issues title insurance contracts to real estate owners, purchasers, andmortgage lenders, indemnifying them against loss or damage arising out of defects in,liens on, or challenges to their title to real estate.

Variable annuity contractAn annuity in which the amount of payments to be made are specified in units, ratherthan in dollars. When payment is due, the amount is determined based on the value of


the investments in the annuity fund.

Whole-life contractInsurance that may be kept in force for a person's entire life by paying one or morepremiums. It is paid for in one of three different ways: (a) ordinary life insurance(premiums are payable as long as the insured lives), (b) limited-payment life insurance(premiums are payable over a specified number of years), and (c) single-premium lifeinsurance (a lump-sum amount paid at the inception of the insurance contract). Theinsurance contract pays a benefit (contractual amount adjusted for items such as policyloans and dividends, if any) at the death of the insured. Whole-life insurance contractsalso build up nonforfeiture benefits.

Appendix B: BACKGROUND INFORMATION AND SUMMARY OFCONSIDERATION OF COMMENTS ON EXPOSURE DRAFT

67. As discussed in Statement 32, the FASB is extracting the specialized 9 accounting andreporting principles and practices from AICPA SOPs and Guides on accounting and auditingmatters and issuing them as FASB Statements after appropriate due process. This Statementextracts without significant change the specialized principles and practices relating to insuranceenterprises from the AICPA Industry Audit Guides, Audits of Stock Life Insurance Companiesand Audits of Fire and Casualty Insurance Companies; and AICPA SOPs 78-6, 79-3, and 80-1;and Opinion 23. Accounting and reporting standards that apply to enterprises in general alsoapply to insurance enterprises, and the standards in this Statement are in addition to thosestandards.

68. Board members have assented to the issuance of this Statement on the basis that it is anappropriate extraction of existing specialized principles and practices and that a comprehensivereconsideration of those principles and practices was not contemplated in undertaking this FASBproject. Most of the background material and discussion of accounting alternatives have notbeen carried forward from the AICPA insurance industry related Guides and SOPs. The Board'sconceptual framework project on accounting recognition criteria will address recognition issuesrelating to elements of financial statements. A Statement of Financial Accounting Conceptsresulting from that project in due course will serve as a basis for evaluating existing standardsand practices. Accordingly, the Board may wish to evaluate the standards in this Statementwhen its conceptual framework project is completed.

69. This Statement does not address issues that currently are being studied by the insuranceindustry and the accounting and actuarial professions. Some of those issues include:

a. What financial accounting and reporting principles should mutual life insurance enterprises,assessment enterprises, and fraternal benefit societies follow in their general-purpose


financial statements?b. How should universal life insurance contracts and similar products that have been

developed since the AICPA insurance industry related Guides and SOPs were originallyissued be accounted for?

c. For short-duration contracts:(1) Should certain claim liabilities be discounted?(2) Should anticipated investment income be considered in determining if a premium

deficiency exists?d. What circumstances constitute a transfer of economic risk under a reinsurance contract?

70. An Exposure Draft of a proposed FASB Statement, Accounting and Reporting byInsurance Enterprises, was issued on November 18, 1981. The Board received 56 commentletters in response to the Exposure Draft. Certain of the comments received and the Board'sconsideration of them are discussed in this appendix.

Criteria for Distinguishing between Short-Duration and Long-Duration Contracts

71. Respondents commented on the appropriateness of the proposed criteria for distinguishingbetween short-duration and long-duration contracts and on whether the criteria could beimproved. Some respondents said that the criteria were not well defined and could result inunintended changes in current accounting principles or practices because the criteria focused toonarrowly on whether an insurance contract can be expected to remain in force for an extendedperiod. They suggested that the criteria be clarified so that the nature of the insuranceenterprise's obligations and policyholder rights under the provisions of the contract is considered.

72. Other respondents recommended that (a) accounting for insurance contracts shoulddepend on the type of insurance enterprise issuing the contract, (b) the criteria for distinguishingbetween the two types of contracts should be based on the period of the contract, or (c) contractsshould be specified by type of insurance protection that should be considered short-duration orlong-duration so that the Statement can be specifically applied without exception or ambiguity.

73. In extracting the specialized principles and practices from the AICPA insurance industryrelated Guides and SOPs, the Board decided to establish a framework for accounting byinsurance enterprises based on the nature of insurance contracts rather than type of insuranceenterprise. The Board concluded that the criteria for distinguishing between short-duration andlong-duration contracts should be clarified so that the nature of the insurance enterprise'sobligations and policyholder rights under the provisions of the contract is considered, becausethat is consistent with (a) a general framework, (b) the principles in the AICPA insuranceindustry related Guides and SOPs, and (c) current practice.

Impairment in Value of Publicly Traded Securities

74. If an investment in a publicly traded security is reduced to its net realizable value,


paragraph 51 requires that a gain not be recognized until the sale, maturity, or other dispositionof the investment. Some respondents argued that permanent impairment is too absolute andoften cannot be determined until after the event causing the impairment has occurred. Inaddition, they said that accounting for impaired amounts relating to publicly traded securitiesshould be consistent with accounting for mortgage loans and real estate investments andreflective of an insurance enterprise's estimate of its ability to recover the carrying amount ofthose securities. They suggested that a standard consistent with Statement 5 be included torequire adjustments of the carrying amount as circumstances change.

75. Other respondents agreed with paragraph 51 because it is an accurate extraction of SOPs78-6, 79-3, and 80-1 and is consistent with principles and practices applicable to enterprises inother industries. Based on that reasoning, the Board concluded that adjustments for increases invalue of previously impaired publicly traded securities should continue to be proscribed.

Acquisition Costs: Primarily versus Directly Related

76. Some respondents commented on the definition in paragraph 28 that states that acquisitioncosts are those costs that vary with and are primarily related to the acquisition of new andrenewal insurance contracts. They pointed out that, while the term primarily currently is used inpractice by life insurance enterprises, the term directly is used in practice by property andliability insurance enterprises. They said that using the term primarily for all insuranceenterprises could produce a different result for property and liability insurance enterprises. Theyrecommended that the distinction between primarily and directly be retained in prescribingaccounting principles for acquisition costs.

77. The Board believes that accounting principles and practices should not be applieddifferently among insurance enterprises without differences in underlying circumstances.Because the term primarily encompasses directly, the Board acknowledges that use of the termprimarily might allow property and liability insurance enterprises to adopt broader guidelines indefining acquisition costs that are capitalizable. However, the Board believes that the use of theterm primarily should not cause insurance enterprises to change their methods of definingacquisition costs to be capitalized.

Disclosure of the Average Rate of Assumed Investment Yields

78. Respondents commented on the benefits and costs of specifically requiring a disclosure ofthe average rate of assumed investment yields used in estimating the liability for future policybenefits. Some respondents said that disclosure of the average rate of assumed investment yieldsshould be required because the disclosure would be relevant to users in assessing thereasonableness of estimated rates of return in relation to current investment yields and incomparing insurance enterprises. They also expressed the view that the cost to the reportingenterprise would be minimal and that the benefit to users of insurance enterprise financialstatements would outweigh the related cost.


79. Other respondents said it is likely that the development of a single average interest ratewould involve a time-consuming and costly process that would not be justified by the benefit.They also argued that the weighted average of interest rate assumptions has little meaning whenthere are other significant assumptions that also must be considered in estimating the liability forfuture policy benefits and that the disclosure would likely result in a general perception that therate possessed more significance and value than deserved.

80. The Board agrees with those respondents that said disclosure of the average rate ofassumed investment yields is useful in assessing the reasonableness of estimated rates of returnin relation to current investment yields and in comparing insurance enterprises. However,because of uncertainties relating to the cost of providing that disclosure, the Board decided toencourage but not require disclosure of that yield rate.

Disclosure of Discounting Short-Duration Contract Claim Liabilities and ConsideringAnticipated Investment Income in Determining Premium Deficiencies

81. The Exposure Draft would have required disclosure of (a) the effects (including amounts)of discounting short-duration contract claim liabilities and (b) the effects (including amounts) ofan enterprise's considering anticipated investment income in determining if a premiumdeficiency relating to short-duration contracts exists. Some respondents said that insuranceenterprises generally are not disclosing amounts in their notes because they believe disclosure ofamounts is not required in the AICPA insurance industry related Guides and SOPs, whichrequire disclosure of only the effects. Other respondents recommended that the Exposure Draftbe revised to require disclosure of the carrying amount of claim liabilities carried at presentvalue in the balance sheet, the range of interest rates used to discount the claim liabilities, andthe period of years over which the claims are being paid.

82. The phrase including amounts was included in the Exposure Draft to clarify what theBoard understands was meant by effects on the financial statements in SOP 78-6. The Boardbelieves that quantitative disclosures relating to the discounting of short-duration claim liabilitiesis necessary and, accordingly, decided to require disclosure of the carrying amount ofshort-duration contract liabilities that are presented at present value and the range of discountrates. However, the Board agreed that disclosure of amounts relating to an insurance enterprise'sconsideration of anticipated investment income in determining whether a premium deficiencyexists is not necessary, and decided to require disclosure of only whether the insurance enterpriseconsiders anticipated investment income in making that determination.

Disclosure of Statutory Requirements

83. With respect to the proposed disclosure of information relating to statutory capital andsurplus requirements, some respondents suggested that disclosure be limited to the amount ofstatutory capital and surplus, minimum statutory requirements when significant, and statutory


limitations on the payment of dividends. Other respondents recommended that the proposeddisclosures parallel those in the SEC's recent revision of Article 7 of Regulation S-X. The Boardagreed that the disclosure relating to statutory requirements needed clarification and revised thedisclosure in accordance with the first sentence of this paragraph.

Reconciliation Disclosure

84. Respondents commented on whether disclosure of a reconciliation between financialreporting and statutory capital and income should be required. Some respondents said thedisclosure should be required because the differences between statutory accounting practices andgenerally accepted accounting principles are an important element in the analysis of an insuranceenterprise's general-purpose financial statements. They pointed out that statutory accountingdetermines the amount of dividends that can be paid as well as the sufficiency of statutory capitaland surplus for regulatory purposes and, therefore, is important to users of insurance enterprisefinancial statements.

85. Other respondents said the reconciliation disclosure should not be required because theoriginal purpose of the reconciliation was intended principally to provide relevant informationduring the life insurance industry's transition from statutory reporting. They also said that thedisclosure may cast doubt on the appropriateness of accounting principles used in thegeneral-purpose financial statements.

86. The Board believes that the disclosure in paragraph 60(h) relating to statutoryrequirements is sufficient for the general-purpose financial statements of insurance enterprises.

Other Comments

87. Some respondents noted that paragraph 10 of the Exposure Draft would require a liabilityfor claim adjustment expenses to be accrued when insured events occur and that life insuranceenterprises currently are not accruing those costs. They said that accruing claim adjustmentexpenses associated with unpaid claims would require an accounting change for life insuranceenterprises and that, although it may be appropriate to require life insurance enterprises to accruea liability for those costs, those enterprises should be excluded from that requirement since theAICPA stock life insurance guide does not require that accrual. However, they acknowledgedthat the change is not likely to significantly affect the financial statements of life insuranceenterprises. The Board believes that the requirement is appropriate and that it meets a criterionfor change—that is, practices among insurance enterprises are different without differences incircumstances. In addition, the Board believes the requirement is consistent with the provisionsof Statement 5.

88. Several respondents suggested various substantive changes to the Exposure Draft.Adoption of those suggestions would have required a reconsideration of some of the provisionsof the Guides and SOPs. Such a reconsideration is not contemplated in the extraction project


unless a proposed change meets one of the three criteria for change included in the "Notice forRecipients" of the Exposure Draft or is broadly supported. The proposed changes did not metthe criteria for change and were not broadly supported. Accordingly, the Board did not adoptthose suggestions. However, based on suggestions from respondents to the Exposure Draft, theBoard has made several other changes that it believes clarify the Statement.

89. The Board has concluded that it can reach an informed decision on the basis of existinginformation without a public hearing and that the effective date and transition specified inparagraphs 64 and 65 are advisable in the circumstances.


Footnotes

FAS60, Footnote 1--Terms defined in the glossary (Appendix A) are in boldface type the firsttime they appear in this Statement. FAS60, Footnote 2--Property and liability insurance enterprises, for purposes of this Statement,include stock enterprises, mutual enterprises, and reciprocal or interinsurance exchanges. FAS60, Footnote 3--In force refers to the period of coverage, that is, the period during which theoccurrence of insured events can result in liabilities of the insurance enterprise. FAS60, Footnote 4--Certain disclosures are required if the time value of money is considered inestimating liabilities for unpaid claims and claim adjustment expenses relating to short-durationcontracts (paragraph 60(d)). FAS60, Footnote 5--Title insurance internal claim adjustment expenses, which generally consistof fixed costs associated with a permanent staff handling a variety of functions including claimadjustment, ordinarily are expensed as period costs because the costs are insignificant. FAS60, Footnote 6--Disclosure is required regarding whether the insurance enterprise considersanticipated investment income in determining if a premium deficiency relating to short-durationcontracts exists (paragraph 60(e)). FAS60, Footnote 7--This paragraph is not intended to preclude the accrual of losses onprivate-placement bonds when both conditions in paragraph 8 of FASB Statement No. 5,Accounting for Contingencies, are met.

FAS60, Footnote 8--The Act contemplated taxation of total income of life insurance enterprises,but the determination of tax is complex because of the manner in which total taxable income isclassified as investment income, gain from operations (including investment income and lessspecial deductions for certain accident and health, group life, and nonparticipating insurancecontracts), policyholders' surplus (gain from operations previously excluded from tax and thespecial deductions), and the interrelationship of those elements. Taxable income consists of (a)taxable investment income, (b) 50 percent of the amount by which gain from operations exceedstaxable investment income, and (c) any reductions in policyholders' surplus. If gain fromoperations is less than taxable investment income, the lesser amount, plus any reductions inpolicyholders' surplus, is taxable income. If a loss from operations occurs, there is no taxableincome except to the extent that there are reductions in policyholders' surplus. Deductions fromgain from operations for policyholder dividends and the special deductions are limited andunused deductions cannot be carried forward to subsequent periods. FAS60, Appendix B, Footnote 9--The term specialized is used to refer to those accounting and


reporting principles and practices in AICPA Guides and SOPs that are neither superseded by norcontained in Accounting Research Bulletins, APB Opinions, FASB Statements, or FASBInterpretations.

statement of financial accounting standards no. 60 · statement of financial accounting standards...

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